Analysis And Valuation Of Qantas Airways

Five Forces Framework

It is necessary for the managers of the companies and the users to consider analysing the financial performance along with its valuation as this obtained information helps them in making the decision of whether they can invest in the company or not. The main aim of this report is to take into consideration the analysis and valuation of the business of Qantas Airways (Qantas). More specifically, this report considers the five forces analysis and SWOT analysis of Qantas. After that, this report involves analysing the corporate strategy and certain financial regulation of the company. After that, the report considers the analysis of the financial performance of Qantas in order to provide the recommendation.

The following discussion shows the competitive forces analysis of Qantas:

Bargaining Power of Buyers: Qantas has to face high bargaining power from the customers due to the presence of many airline companies in this Australian airline sector. They provide affordable travelling cost, luxury and others.

Bargaining Power of Suppliers: The presence of numerous suppliers can be seen in the Australian airline industry providing the required materials to the airline companies. For this reason, Qantas faces low bargaining power from their suppliers (E. Dobbs 2014).

Threat of New Entrants: When entering into the Australian airline industry, the new companies are needed to make huge investments and have to comply with many regulations from the government. Hence, this threat can be considered as low for Qantas.

Competition among Existing Competitors: The presence of certain large airline companies can be seen in the Australian airline industry like Virgin Airline and others that provide tough competition to Qantas. For this, this threat can be considered as high for Qantas (afr.com 2019).

Threat of Substitutes: Passengers can travel in the fastest possible manner through airlines as it is the quickest way of travelling. For this, Qantas face low threat related to the substitute products.

The SWOT analysis of the business of Qantas is discussed below:

Qantas has employed certain specific corporate strategies for their national and international business since 1992. Evolving certain major competitive advantages in order to create long-term values for their passengers and integrated business portfolio has been the major business strategy of Qantas since 1992. In order to achieve this, Qantas has been putting equal importance for the development of both national and international business. For this, Qantas adopted the strategy to ensure sufficient investments in the brands of airline in their business portfolio. Since 1992, one significant strategy that Qantas has been perusing is to develop a major shift in their cost base through certain specific business transformation (investor.qantas.com 2019). These strategies have been contributing hugely for the business success of Qantas.

SWOT analysis

However, Qantas was forced to bring certain changes in these strategies as the market condition has changed drastically over the years. Qantas had to enhance their brand portfolio in the recent years because of the increase in competition in both national and domestic market. The introduction of Qantas Loyalty and Jetstar can be considered as the outcome of this strategy change. Increase their presence in the international airline market can be considered as another strategy change as the international market is consisting certain major busies opportunities for them. In addition, Qantas has introduced more talent, effective leadership and diversity as improved business strategies (qantas.com 2019). 

The two accounting policies are shown below:

IFRS 15 Revenue from Contracts with Customers: The Australian airline companies have to face certain changes while dealing with air tickets, cargo bills and others in the introduction of IFRS 15 and thus, this regulation is considered. Tickets are non-refundable under the current act. However, new IFRS 15 will authorize the airline companies in recognizing the revenues coming from tickets on earlier basis. Apart from this, the introduction of IFRS 15 will make the airline companies able to recognize revenues before the tickets expire (assets.kpmg 2019).

IFRS 16 Leases: The Australian airline companies have to bring certain major fundamental changes in their lease accounting due to the introduction of this standard and thus, this standard is selected. Under the current accounting regulation, airline companies are using off-balance sheet financing along with rating the required airline facilities. However, the companies will have to show all the previously off-balance sheet leases in the balance sheet under new IFRS 16 which will lead to the addition of trillions of dollars of lease inabilities in the balance sheets of the airline companies of Australia (pwc.com 2019). The auditors need to monitor this whole process very carefully as it provides the scope of material misstatements.

The following table shows the changes in Revenue and Expenses of Qantas at the end of 2013 and 2017:

As per the above table, Qantas’s revenue increases from the year 2013 to the year 2017 which shows the improvements in the business performance of the firm. In addition, the company has been successful in reducing their expenses from 2013 to 2017. This is a condition when companies can increase their overall profitability (Delen, Kuzey and Uyar 2013). Hence, increase in financial performance of Qantas is evident in 2017 as compared to 2013.

Corporate Strategy of Qantas and Changes in the Strategies

The following table shows the changes in Qantas’s assets, liabilities and equity from the end of 2013 to the end of 2017:

It can be seen from the above table that 2017 witnesses overall decrease in the total assets of Qantas when compared to the end of 2013. After that, total liabilities of Qantas also decreases at the end of 2017 when compared to the end of 2013. At the same time, decrease in total equity of Qantas can be seen at the end of 2017 when compared to the year end of 2013. Thus, the decrease in total assets and total liability is not good for the business of Qantas (Ngary et al. 2014).

As per the findings of the previous section, it can be seen that the decrease in total expenses as well as increase in the total revenue indicates towards the enhanced or improved financial performance of Qantas in the recent years. This aspect leads to the increase in profitability of the firm in the recent years (Malatji, Zhang and Xia 2013). However, when discussing about the components of the financial position of Qantas that are assets, liabilities and equity, reduction in these substances in 2017 as compared to 2013 shows the unimpressive financial performance of Qantas. However, improvement in the financial position of Qantas is evident from the slight decrease in the total liabilities of Qantas in 2017 from 2013 (Levy 2015).

It can be seen from the above discussion that Qantas has a mixed performance in 2017 as compared to 2013 when the financial performance and financial position is considered. The financial performance of Qantas is effective in 2017 but the company’s financial position has not improved in 2017. Based on this information, two recommendations are provided below:

1. Improve in financial performance of Qantas implies the increase in revenue and profit while decrease in expenses. It implies that Qantas is managing their revenue and expenses in an effective manner for increasing profitability. For this reason, it is recommended to the potential investors to buy the shares of Qantas due to effective financial performance; and the existing shareholders should retain the shares.
2. On the other hand, assets, equity and liabilities decreases in 2017. Decreases in total equity indicates the decrease in the number of shareholders; and reduces number of shareholders increases the proportion of company’s profit that the shareholders receive. On the other hand, decrease in liability is goods for the company. Hence, in the presence of these aspects, it is recommended to the potential investor to buy the shares of Qantas and the existing shareholders should retain the shares of the company.  

Conclusion

It can be seen from the above discussion that Qantas has to take into consideration the effects of their competitive forces at the time of the development of business strategies. At the same time, Qantas needs to consider the strengths, weaknesses, opportunities and threats of their businesses for strategy development. The above discussion also states that the auditors of the Australian airline companies are needed to consider the introduction of IFRS 15 and IFRS 16 in their business as these can create material misstatements in the financial statements. It can also be seen from the above that the company has improved financial performance; there is decrease in assets, liabilities and equity. However, in spite of effective financial performance, the investors are recommended to buy or retain the shares of Qantas. 

References

Assets.kpmg. (2019). [online] Available at: https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/06/ifrs15-airlines-application-guidance.pdf [Accessed 28 Feb. 2019].

Australian Financial Review. (2017). Australian aviation not for the faint-hearted . [online] Available at: https://www.afr.com/brand/chanticleer/australian-aviation-not-for-the-fainthearted-20170628-gx0dms [Accessed 28 Feb. 2019].

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

1. Dobbs, M., 2014. Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45.

Hatch, P. (2017). Qantas profit slides as international competition revs up, stoking ‘unprecedented airfare’ discounts. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/companies/qantas-profit-slides-as-international-competition-heats-up-20170223-guj5x5.html [Accessed 28 Feb. 2019].

Investor.qantas.com. (2019). [online] Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/AH_NGR9NxUaXc0W8Qv3Kfg/docs/QantasAnnualReview2017-06-Delivering-Against-Clear-Strategic-Pillars.pdf [Accessed 28 Feb. 2019].

Levy, H., 2015. Stochastic dominance: Investment decision making under uncertainty. Springer.

Malatji, E.M., Zhang, J. and Xia, X., 2013. A multiple objective optimisation model for building energy efficiency investment decision. Energy and Buildings, 61, pp.81-87.

Ngary, C., Smit, Y., Juan-Pierré, B. and Ukpere, W.I., 2014. Financial performance measures and business objectives attainment in fast food SMMEs in the Cape metropolis: a preliminary liability and suitability analysis. Mediterranean Journal of Social Sciences, 5(20), p.909.

Pwc.com. (2019). [online] Available at: https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-16/ifrs-16-implications-for-the-airlines-industry.pdf [Accessed 28 Feb. 2019].

Qantas News Room. (2019). Qantas Group Strategy Update. [online] Available at: https://www.qantasnewsroom.com.au/media-releases/qantas-group-strategy-update-2/ [Accessed 28 Feb. 2019].

Qantas.com. (2019). Our strategic plan | Qantas. [online] Available at: https://www.qantas.com/us/en/qantas-group/looking-ahead/our-strategic-plan.html [Accessed 28 Feb. 2019].

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